Rich Goodwin never expected to tell his own son to get out of Wisconsin. In fact, for years he thought his sons would finish college and join him in his business, Milwaukee-based ACME Sales. But last year, Goodwin told his son, Patrick, “You have to get the hell out of Wisconsin. You can’t afford these taxes.”
Patrick, who spent part of the year as a commercial fisherman in Alaska and part working with his father, soon moved to the frigid, no-income tax state. And, the senior Goodwin says, his younger son, Brendan, who settled in Cincinnati after college, is “happy he’s not paying Wisconsin taxes, too. If I could do it, I would leave, too. They’re gouging us. I don’t think people realize how bad it is.”
What happened in the Goodwin family is a radical departure from Wisconsin’s past. A generation ago, the expectation was that you would grow up, go to college and spend the rest of your life working in Wisconsin. But today, the offspring of white-collar workers are graduating from college and increasingly leaving the state. And more and more, their parents, once they retire, are following their kids (and their grandkids) out of state.
Part of the rationale for Wisconsin’s historic high levels of spending on education has been the economic dividend it would pay later, when those kids became the state’s workers. But increasingly, “the state’s investment goes to help other states,” says Dale Knapp, research director for the nonpartisan Wisconsin Taxpayers Alliance (WTA), referring to the state’s much discussed “brain drain” of recent college grads.
A 2001 study by University of Wisconsin-Oshkosh economists showed that the number of graduates that leave the state increased with time and that the brightest graduates were the most likely to go. A 2002 study by the state Department of Workforce Development showed Wisconsin lagging 10 percentage points behind the national average (61.6 percent), ahead of only Indiana in the percentage of grads who continue to reside in the state following graduation.
“I am constantly surprised by how many 55-, 60- and 65-year-old people I meet whose kids have all left the state,” says Todd Berry, WTA president. Part of the explanation is that Wisconsin’s pay levels in every occupation except government work and construction are so far below the national average, and its tax bite so far above it, that it just makes financial sense to move elsewhere. But in the process, Wisconsin is losing the higher-income earners of tomorrow, individuals who could help pay the cost of state and local government.
At the same time, the state ranks “dead last nationally in attracting mid-career white-collar talent,” adds Berry. The jobs aren’t here. The pay isn’t high enough. The state’s reputation as a “tax hell” – the words Money magazine and other publications repeatedly use to describe Wisconsin, with its income tax 52 percent above the national average and property taxes 24 percent above – is so off-putting that some would-be transferees refuse to even get on a plane to see what our quality of life has to offer.
“Nine times out of 10, if I can get them here, I can get them to move,” says Jill J. Morin, part of the CEO team at Kahler Slater architects. The 130-person firm is “willing to pay in the top quartile to get talented people here because our clients like to work with the best talent,” says Morin. But even then, she says, “Our high tax reputation turns people off right away. They never come here and see what we have in Wisconsin.” Kahler Slater has increasingly resorted to mining the alumni of the University of Wisconsin-Milwaukee’s architecture school, tracking down the student stars of 10 or 15 years ago, then trying to lure them back.
The conventional wisdom used to be that the state’s young people would work elsewhere, then come back home to raise a family. At one time, Wisconsin was second only to Pennsylvania in this homing pigeon phenomenon, but that’s no longer a given, a fact reflected in the state’s abysmal in-migration numbers for the college educated.
Coming back once you’ve lived elsewhere can be financially difficult. Just ask Mary Andrew. Andrew grew up in tiny Adell, Wisconsin, near Sheboygan, and when her husband Bob’s job kept him on the road so much he missed even their children’s birthdays in 2001, the couple decided it was time to leave suburban Detroit. The Andrews wanted to come back to Wisconsin, and Bob found a job in Madison, but when the couple went house shopping, they were shocked. The property taxes on a home in suburban Sun Prairie were double what they’d been on a similar home in Michigan.
“What’s discouraging is that’s the part of your monthly payment that will never go down,” notes Mary, explaining that the real estate agent tried to ease the sticker shock by explaining that they wouldn’t have to pay for garbage collection here. “Garbage collection cost $150 a year in Michigan,” Mary says, and the car license here is $45 instead of $120, but that’s hardly enough to make the higher taxes palatable. “I know we have a good school here, but I can’t say it’s twice as good as the one we left in Chesterfield, Michigan,” says Mary.
In the end, the Andrew family downsized their home to move to Wisconsin, but many would-be transferees won’t make that sacrifice. And the tax burden gets heavier on those who remain. Which brings us to the question of what will it take to change, when we’re already facing a $3.2 billion deficit? And what are the implications if we don’t?
If you’re fiscally responsible, before you trade in your old Honda for a MINI Cooper, you’ll determine what percent of your monthly income the new car will consume and whether you can afford it. If you buy a house, the mortgage lender will do the same thing – look at your income and compare the mortgage payment to it, as a percent of income. The most common way to compare state and local taxes from one state to another is to look at taxes as a percent of income, too. The U.S. Census Bureau did this originally, adding up the property, income and sales taxes in a given state (including all licensing fees: cars, hunting, professional, et cetera), then reporting that as a percent of the state’s per capita personal income.
Nowadays, the Census Bureau supplies the data, but the calculations are done by the nonprofit, nonpartisan Tax Foundation (the group that created Tax Freedom Day); the Wisconsin Taxpayers Alliance, founded 70 years ago by Phillip F. LaFollette (son of the famous Progressive governor and senator, “Fighting Bob”); and by most public finance researchers.
When you compare states, you have to look at both local and state taxes because the two are so intertwined. In Wisconsin, for example, more than 60 percent of the state budget goes to ease local property taxes. According to the Tax Foundation, Wisconsin residents paid 12 percent of their income in state and local taxes in 2002, down slightly from what they paid a year earlier because of adjustments in the income tax rates and the slowing economy (this is an estimate; final numbers aren’t available until 2004).
That 12 percent translates into $120 per $1,000 of income. Only the residents of Maine (12.8 percent) and New York (12.3 percent) paid more. Wisconsinites paid 17.6 percent more than the national average.
This means Wisconsin residents worked 121 days last year to pay all of their local, state and federal taxes; 43 days just to pay state and local taxes. In comparison, they worked 106 days for all of their food, clothing and shelter combined. When you include federal taxes, 33.7 percent of Wisconsinites’ personal income went to taxes last year. That doesn’t look bad if you’re coming from Sweden, where taxes consumed 53.4 percent of individual income in 2001, but it doesn’t look good when you consider that medieval serfs, who paid one-third of their income in taxes, were considered slaves. And compared to a lot of other states, at the height of tax season, it looks like hell. Tax hell.
Wisconsinites aren’t new to the ninth ring of Dante’s Hell. In fact, it seems like we’ve been stuck there for eternity. Going back to 1971 (the earliest Tax Foundation data on its Web site), Wisconsin ranked third highest, after Vermont and New York, in state and local tax burden. (The latest updated numbers from the U.S. Census Bureau for 2000 rank Wisconsin fourth that year.) During the past three decades, Wisconsin has never gotten out of the top 10 hottest tax hells, according to the Tax Foundation. Since 1993, we have been stuck in second or third place in its rankings (fourth in some years, according to the Taxpayers Alliance). And if your income falls between $30,000 to $121,000, you’re paying the second-highest taxes in the country, after New York, according to a January 2003 report by the Institute on Taxation and Economic Policy. “These are the incomes earned by the white-collar professionals we’re trying to keep and lure here,” says Berry.
Milwaukee Magazine asked the Wisconsin Department of Revenue to figure out what it would take to get the state out of the top 10 worst tax hells. Research director Yeang-Eng Braun calculated that it would have required a $1.28 billion cut in state and local spending, more than 7 percent, to move us to number 11 in 2000, but then only if the other states did nothing. And that’s the problem. While we’ve been raising taxes, other states have been lowering them. In Wisconsin, between FY 1990 and 2000, state and local taxes increased 81.4 percent, outpacing personal income growth by 10.2 percent, according to the U.S. Bureau of Economic Analysis.
Meanwhile, other states were improving their lot, driven by a wave of early 1990s tax revolts. (Wisconsin averted one by changing the school funding formula.) Since 1993, 20 states have decreased their general fund spending as a percentage of personal income, according to the Center on Budget and Policy Priorities. Massachusetts, consistently one of the five highest-taxing states in the 1970s and early ’80s and one of our original role models, dropped to 39th in 2002, according to the Tax Foundation. It did that by cutting costs and instituting measures that limit spending increases. Relying more on strong town governments like Wisconsin’s, Massachusetts eliminated all county government.
After it enacted a law requiring a supermajority two-thirds vote in the legislature to approve any tax increase, the no-income tax South Dakota saw its tax burden drop from eighth highest 30 years ago to 44th in 2002. No-income tax Arizona required a two-thirds supermajority for tax hikes, too, and it attracted a lot of wealthy immigrants to help pay the bills, moving its tax burden down from 10th highest to 28th.
And in 1992, Colorado residents passed the Taxpayers’ Bill of Rights, which limits the growth of government expenditures to the inflation rate and requires a supermajority for any tax increase. Then voters set term limits for their part-time legislature and also passed a sunset law for any tax increase unless approved by voters a year after passage.
The rationale behind the supermajority is that it must be more difficult to raise taxes than it is to cut spending, and it’s helped Colorado improve its tax burden rank from 22nd highest in 1990 to 45th in 2002. In the ’90s, Colorado grew 30.6 percent compared to the national average of 13.2 (Wisconsin grew 9.6 percent). And, according to the Federal Reserve Bank of Minneapolis, Colorado became the leading importer of college graduates from states like Wisconsin.
Janesville dentist Wayne M. Gilmore has seen the improvement. In 1979, he purchased a condo in Steamboat, Colorado. Today, it is valued at $220,000 and Gilmore’s 2002 Colorado property tax bill has held steady, close to the $970 he paid this year. Meanwhile, property taxes on Gilmore’s home in Janesville, which is valued at just $5,000 more than the Colorado condo, have increased dramatically to this year’s $4,900. Some might argue that services are better in Wisconsin, but Gilmore doesn’t see it. “Schools, water, police and fire, the hospital are all as good or better in Colorado,” he says.
Gilmore, who’s semi-retired, says he’s staying in Wisconsin because his kids and grandkids are here, but if they weren’t, he might follow his best friend, a retired orthodontist, to Florida. The friend still spends half the year in northern Wisconsin, but “90 percent of the reason he moved his residence to Florida was for tax purposes,” says Gilmore. “He saved enough in income taxes to almost pay for his condo in Florida.… It’s real. Taxes really do influence people’s decisions.”
The “trend of wealthy people leaving Wisconsin when they retire has really increased,” says tax accountant Rhona Vogel, who advises families with incomes of more than $200,000. “It has had a huge impact over the last 10 years, and the younger people are leaving for career opportunities. Once they move, there’s no incentive for the parents to stay,” says Vogel. “We have a lot of families where all the children have left, even though the family has been here for 40 or 50 years. I realize this is anecdotal, but it’s widespread.” The state’s chief labor economist, Terry Ludeman, has no doubt Vogel is right. “I’m sure we’re a net exporter of high-income retirees,” he says. “They move because they can afford to do it.”
Taxes also influence the economic health of a state. A 2001 study by Ohio University economist Richard Vedder for the U.S. Congress’ Joint Economic Committee found that low-tax states dramatically outperformed high-tax states in job growth and personal income and particularly in attracting more residents. And a policy analysis by Stephen Moore and Stephen Slivinski for the Cato Institute compared the 10 states that increased taxes most between 1990 and 1998 with the 10 that cut taxes most and found “compelling evidence that states lowering their overall tax burdens significantly improve their economic conditions and their financial competitiveness, surpassing them in employment growth… income gains, drops in unemployment and higher bond ratings.”
State tax rankings have new importance today as states compete not just for businesses and jobs, as they did in the 1980s, but for wealthy new retirees, mid-career talent and bright new college grads. Clearly, other considerations go into relocation decisions: career opportunities, pay, quality of life and cost of living. But state and local taxes are part of that cost, and educated white-collar workers are the most likely to check how a state compares before they consider a move, just as top-caliber high school students refer to college rankings.
UW-Madison toughened its admission criteria several years ago, in part in recognition that college rankings like U.S. News & World Report reward exclusivity. But many of the university’s experts, along with state politicians, insist a state’s tax ranking really doesn’t influence people much and that the quality of life here is “worth the higher taxes.” But off the government payroll, fewer people are convinced that it’s government spending that creates quality of life. Says Goodwin, whose sons have left: “My quality of life, if I have it, is because… I’ve established it, not the state.”
Gov. Jim Doyle’s no-tax-increase budget seems to address the state’s high tax rank, but getting it through the Legislature will be a catfight. But why, exactly, are taxes so high? One reason, says Wisconsin Depart-ment of Revenue research director Braun, “is the state’s revenue mix. We get less federal aid [42 states fare better, according to the Tax Foundation] and we rely less on non-tax revenue sources – fees and charges – than do other states.” As a result, taxes have to cover a larger share of our spending. Because the state’s sales tax is relatively low (35th), income and property taxes must make up a larger share of the budget. Unfortunately, those giant lump-sum taxes are the ones people hate paying most.
And they are most damaging to a state’s economic health, according to William D. Eggers, senior research fellow for the Manhattan Institute in a report to the American Legislative Exchange Council. “Sales taxes are relatively benign,” says Eggers, “while income taxes have sharply detrimental effects.” In the 1990s, nearly three-quarter million native-born Americans left the 41 states with general income taxes for the nine states that allow individuals to keep the fruits of their labors [Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no income tax. Tennessee and New Hampshire tax only dividends and interest income]. That differential behavior can explain a lot of variation in growth rates between states,” says Vedder.
In 2001, according to WTA, Wisconsin ranked 49th nationally in per capita receipt of federal dollars; 40th when federal dollars are measured as a percent of personal income. Wisconsin can’t really control the net inflow of federal dollars, says Braun, but it can control fees and charges.
In FY 2000, the state was 4 percent above the national average (ranking 28th) in revenue from tuition, education, hospital charges and parking and recreation fees.
Yet the tuition charged by the state’s public university system is typical of Wisconsin’s low fees. Compare UW-Madison, UW-Milwaukee, the state’s 11 other four-year public campuses and 13 two-year colleges with their peer institutions elsewhere, and in every category, Wisconsin’s in-state tuition is near the bottom, says WTA’s Berry. “Even a 50 percent tuition increase would not put UW at the top of the Big Ten.” The argument for low tuition (and low fees in general) has been to guarantee wider public access, he acknowledges. But other states have increased tuition, then provided economic aid to students based on the need to accomplish the same thing at lower cost. Under Wisconsin’s system, workers whose children never go on to college are subsidizing the college educations for the offspring of wealthy Mequon and River Hills residents. And low tuition has cost the state money in other ways, according to former University of Illinois education researcher F. King Alexander, because students at public universities that charge higher tuition are eligible for more federal aid.
It’s possible to add the proceeds from fees and charges to tax revenue and come up with a measure of a state’s own source revenue, the money it raises at home (as opposed to money from Washington). There we rank 11th or 12th. The WTA voters’ guide warns against the deceptive practice (used by some ideologues) of going further and redefining taxes to include federal money the state receives in order to push Wisconsin’s “tax” ranking as low as 20th. “That doesn’t make sense,” says Berry. “Fees and charges are avoidable, and it’s silly to include federal aid because one of the reasons our taxes are high is because we don’t get more federal aid.”
Not everyone thinks Wisconsin’s taxes are high. Says UW-Madison economics professor Don Nichols: “It’s not that taxes are too high, it’s that our incomes are too low.” This is a little like saying, “It’s not that I don’t understand economics, it’s just that your tests are too hard.” That wouldn’t get you very far in professor Nichols’ econ class, but there are IRS and census data to back up at least the second part of his claim. Wisconsin residents aren’t as wealthy as residents of other states. (In Wisconsin, if you and your spouse earn $50,000+ a year, you are in the top 26 percent of taxpayers. If you earn $70,000+, you’re in the top 14 percent of Wisconsin taxpayers, according to the state Department of Revenue. When people talk about soaking the rich, they’re thinking about you!)
Nationally, 8.3 percent of the population earns more than $100,000 a year, but in Wisconsin, the number falls to 6.7 percent, so we have fewer wealthy people to help pay for state and local government. Wisconsin’s personal income per capita averaged $29,270 in 2001, 20th highest among the states, according to the U.S. Bureau of Economic Analysis, but it has been falling relative to the U.S. average and our neighboring states since 1970, according to WTA. In 2000, Wisconsin’s wages averaged 13.3 percent below the national norm.
Residents of 40 states have more accumulated personal wealth than do Wisconsinites, and on this measure, Wisconsin is 50 percent behind the national average. It’s not because we have more poor people; Wisconsin’s poverty rate is actually below the national average. The problem is at the other end of the scale, where the state’s relative lack of wealth means we’re devoting less to investments that generate economic growth because wealthy people fund the venture capital market where they live. In 2000, Wisconsin received only $181 in venture capital per capita, compared to the national average of $2,613. There may be a lot of Wisconsinites like Dr. Wayne Gilmore’s orthodontist friend, who take their wealth and move to a no-income tax state.
One big reason Wisconsin has lower incomes and wealth is that we’re paid less. According to WTA, in 2000, Wisconsin’s per capita income relative to the national average was at its lowest level since 1993. The wage disparity is most pronounced for jobs requiring a college education, and it gets worse the higher up the experience and responsibility scale you climb. Pay in the highest-level math, computer and engineering occupations in Wisconsin, for example, is 16 to 18 percent below the national average. To an individual, that can mean tens of thousands of lost dollars per year.
“Despite the economic boom Wisconsin experienced during the 1990s, the state lost ground in the average wage in nearly every major industry,” says Dale Knapp, WTA research director. In 2001, the average wage per job in Wisconsin’s private sector was $31,847, and in state and local government, $37,595 (see “Fringe Benefits and the Two-class System,” page 68).
Wisconsin gained ground in per capita income in the 1990s, but it was because more women went to work, and in the last few years, per capita income has stagnated.
No one knows for sure why pay scales are depressed here, particularly for higher-level white-collar workers, but there are some theories. Says Dan Stansel, a fiscal policy analyst at the Cato Institute: “One of the primary reasons for flat wages is that taxes and other government spending have been expanding steadily, crowding out worker take-home pay.”
Another theory is that it’s because we have fewer corporate headquarters, which usually pay higher wages. “When Firstar merged with Minneapolis’ US Bank and moved high-paying corporate jobs out of the state, Wisconsin’s average wage in finance, insurance and real estate dropped to 34 percent below the U.S. average,” says Terry Ludeman, Wisconsin Department of Workforce Development labor economist.
Then there’s the possibility that there is less competition for workers here to drive up wages because we don’t have a super-metro area like Chicago or the Twin Cities.
The lower pay here “sheds some light on the brain drain and why, when it comes to middle-age relocation, we’re dead last,” says WTA’s Berry. “When you pay experienced workers 10, 12, 15 percent less, consistently, compared to the national average, then tax them well above average, sooner or later people will respond.” But even then, Wisconsin’s below-average wages don’t explain why our state and local tax burden ranks so high. “If you grossed up all of the income in Wisconsin to the U.S. average, says Berry, “it only moves the state from third highest to fifth.”
Wisconsinites like to think of themselves as fiscally responsible, and in some ways we are. We have lower mortgage delinquency rates than the national average, for example. But since the early 1990s, “we’ve been spending like drunken Badgers,” says a state fiscal analyst who warns “some of the financial commitments we’ve made are ready to explode. We call them Tommy’s time bombs.”
Taxpayers may have been dozing, but the bond rating agency Moody’s wasn’t. It figured out the state wasn’t paying attention to future liabilities and it lowered Wisconsin’s bond rating. But by then, we’d pretty much mortgaged the future. If Wisconsin had restricted increases in tax collection to the rate of inflation and population growth between 1992 and 1998, the state tax burden would be $520 lower per person. Instead, in FY 2000, spending accelerated to become the third highest of any state in the country, a 13.2 percent general fund increase. And the Cato Institute named former Gov. Tommy Thompson to its gubernatorial hall of shame as the third-worst governor in the country for his failure to restrain spending.
Insufficient federal dollars, lower fees and charges, plus below-average incomes all make matters worse, but the real reason Wisconsin is a tax hell has to do with spending. “Eighty percent of the reason Wisconsin’s a high-tax state” can be traced to the above-average spending by state and local governments, says WTA researcher Knapp. In other words: It’s the spending, stupid.
If government had held spending to the national average in FY 1999, Wisconsin would have saved $1.8 billion, says Knapp. Instead, the state maxed out the credit cards and squandered a windfall. During the 1990s, the state generated $2.7 billion in unexpected revenue from the stock market and economic boom, according to the Cato Institute. But unlike Minnesota and Michigan, which each put away $1 billion in rainy day funds, Wisconsin saved nothing.
During the 1950s, Wisconsin’s taxes were above the average “but not by much,” says Knapp. In the 1960s, “we expanded the university system and you saw a real big shift in spending and the tax burden to way above the national average, and it’s been there since.” In the last two years, says Knapp, the biggest spending increases in total dollars have been in grammar school and high school spending, which requires four times more tax money than does the university system.
In 1993, the Legislature agreed to increase its funding for local schools to two-thirds of the cost in exchange for limits on local spending and teacher salary increases. It was an effort to head off a taxpayer rebellion over property taxes, which had been rising at almost 10 percent a year, and to get Thompson re-elected. But now, property taxes are back up. It’s not that we don’t pay enough to fund our schools. Wisconsin ranks eighth nationally in K-12 funding, says Knapp. “Iowa ranks 16th, but their ACT test scores are as high as ours.”
A big part of the difference is pay and benefits. In 2001-’02, administration costs of K-12 schools increased 6.14 percent ($716 per pupil), three times the rate of inflation. Ninety percent of the increase went toward salaries and fringe benefits, according to WTA (see “Fringe Benefits and the Two-class System,” page 68).
Since at least the mid-1990s, Wisconsin has had a structural deficit, taking in less than it spends. “What it comes down to,” says WTA’s Berry, “is we are above average in spending in just about every category… and we have a professional full-time legislature. (A study by the Cato Institute found that the propensity to tax, spend and regulate rises proportionately with politicians’ years in office.)
“All the highest-spending states have full-time legislatures, and the last five or six years have been absolutely a case study where the governor and Legislature did everything but come to grips with the budget problem. They had a short-term re-election focus,” says Berry. “But you can’t blame this all on politicians and let citizens off.”
But if citizens went along for the ride, two years of scandals at every level of government have done much to erase the old trust. Sleeping taxpayers have been awakened by nightmares, like the scandalous Milwaukee County pension plan designed to give the former county executive and long-time county workers millions at retirement. But the Milwaukee Public Schools pension and benefit debacle isn’t much better. Because of it, MPS is $100 million short in its pension fund, and the rising cost of healthcare benefits threatens to bankrupt the system within 10 years.
At the city level, Milwaukee’s mayor paid $375,000 out of his campaign funds to settle a sexual harassment claim with a former staffer. One City Hall alderman is under federal indictment for extortion and mail fraud, another was just sentenced for misuse of government funds for personal gain and the FBI probe isn’t over yet. Meanwhile, “the municipal taxes and fees paid by the typical City of Milwaukee resident have increased more than 60 percent since 1997, and they’re accelerating. Forty-seven percent of the increase has come since 2000 [during the total period, inflation was 15 percent],” says Jeff Browne, president of the Public Policy Forum.
At the state level, four legislators, including the Democratic former head of the powerful Joint Finance Committee, the Democratic senate leader and the Republican Senate and House leaders face a total of more than 40 felony counts for extortion and misuse of funds. Is it any wonder we have a Legislature that can’t balance the budget without stealing from one pocket to bail out another?
Over the past 15 years, state polls have consistently shown taxes to be the top issue concerning citizens. But Wisconsinites “believed they had clean, dependable government.… Clearly, that’s not true anymore. So you can’t trust them with taxes,” James H. Miller, president of the conservative Wisconsin Policy Research Institute (WPRI). “We had an enormous growth of lobbying, a crop of PR people and lobbyists who changed the body politic and made it subservient to special interests on both sides of the political aisle. And their best interests are not the best interests of the state.”
WPRI’s Wisconsin Citizen Survey last March showed that the percent of Wisconsin residents who believe the state is on the right track decreased from 74 percent to 45 percent between July 1998 and March 2002. In September, another WPRI survey showed that 73 percent of Wisconsin residents believed that campaign contributors have more power over state spending than voters. Six out of 10 believed that state government can be “trusted to do the right thing only some of the time.”
Now even some of the state’s retiring teachers are preparing to take their pensions and health benefits and leave. Last November, Bob Moeller, a financial consultant on the payroll of the state’s teachers’ union, the Wisconsin Education Association Council, told teachers how to move their domicile out of Wisconsin when they retire to “avoid our high taxes.”
Explaining that Wisconsin is, “unfortunately,” the third-worst state for retiring if you are two teachers with $60,000 in income, he directed them to Kiplinger’s magazine and a 2002 reference book, America’s Best Low-Tax Retirement Towns, by Eve Evans and Richard Fox. The July 2002 issue of Kiplinger’s ranks the cost of retiring in the nation’s state capitals from lowest to highest cost, and Madison comes in almost last, at 49th! In their book, Evans and Fox call Wisconsin a retirement “tax hell” no fewer than 12 times, giving both Milwaukee and Madison special mention.
Jay Robertson isn’t ready to retire, and he wasn’t a teacher, but two years ago, he sold his family’s third-generation Milwaukee business, Robertson, Ryan Insurance brokerage, and his home overlooking Lake Michigan and moved with his wife, Caroline, and school-age sons to Sarasota, Florida. The area has the fastest job growth in the country, ranks in “Employment Review’s” 20 Best Places to Live and Work and has the third-highest per capita buying power among U.S. metropolitan areas. Does he miss the quality of life and the government services he had in Wisconsin? Not on your life.
Says Robertson, who was a member of the Whitefish Bay Village Board when he lived here: “I kept hearing board members say people ‘get such great services here, they won’t mind a tax increase,’ and I’d say, ‘Wait a minute. I’ve been talking to constituents, and 98 or 99 out of 100 aren’t saying that.’ But they didn’t get it. Taxes up there are just killers. Down here, property taxes are tied to the consumer price index so they can’t hide increased spending by reassessing the property. Whitefish Bay was pulling that.”
Meanwhile, Robertson can’t praise the schools his kids attend enough. They are in the top-rated school district in the state, and because kids with disabilities aren’t mainstreamed in Florida, the classes move at a faster pace and the teacher has more time for each student, he says.
The Robertsons, who were civic leaders in Milwaukee, hosting the Zoo and Bay balls, say their new life is “simpler” and their government cleaner. “A lot of Wisconsin’s problems have more to do with the political ruling class. They start talking about tax dollars as ‘their’ money,” he says.
People like Jay Robertson make state labor economist Ludeman nervous because they make his nightmare about the state’s future that much more real. Ludeman’s scary scenario goes like this: The most significant force in driving a state’s economy, its economic engine, is its demographic makeup, and ours is sputtering.
The WTA’s Berry agrees: “The implication if we continue down this path is that demographically, the state won’t grow as much as others. We’re already aging faster than other states. We’re losing young, college-educated women who go to other states and take two generations of workers with them – themselves and their children. In 10 years, we’ll have a labor shortage. With fewer workers, our tax revenues won’t grow. And the burden will fall on fewer and fewer people to the point where they’ll start to leave, too.”
Ludeman doesn’t want the term attributed to him, but in the insurance business, they call this a “death spiral,” and once you get into one, you never get out. “It’s a damn serious dilemma and it has to be a priority to get this state back on track,” he says.
Other states have tried drastic measures to rein in spending: term limits, limiting spending increases to population growth plus inflation, supermajority votes of both legislative houses before a tax increase. The one good thing is that a lot of other states are facing deficits, and if they raise taxes to cope with them and we can somehow get by without doing it, we can actually improve our position on the tax burden ratings. Maybe another way to get officials to be less friendly to special-interest spending is to tie their salaries either to the size of government (smaller government, larger paychecks) or to the rate of economic growth or both – that is, put them in the same boat as taxpayers.
“If you look at the spending per person in this state, it’s out of control, it’s fiscal insanity,” says Paul Purcell, president and CEO of Robert W. Baird and Co. “These university people and government employees are part of the problem. And if these people don’t get it, people will just keep leaving the state. The data are irrefutable. We compete with other states for bright, young MBAs, but to have a tax structure that’s punitive makes that a lot harder, and if I can’t recruit talent, I can’t be in business here,” says Purcell, who kept his residence in Illinois when he joined Baird in 1994.
Democratic Gov. James Doyle seems to get it. “I have said time and time again that we are not in this fiscal mess because taxes are too low or because the taxpayers have not done their fair share. I mean it,” Doyle has repeated. In the 1980s, it was the corporations who were leaving Wisconsin, but this time around, it may be the individuals.
“But we have an opportunity to avoid something like that now,” says Berry. “We’re at a crossroads. The next several months are crucial.”
Senior Editor Mary Van de Kamp Nohl has been nominated twice for the Loeb Award, the highest recognition for economic reporting.
Tax Myth 1: If my local community approves a school building referendum, the state will pay two-thirds of the cost. This notion helped raise school debt in Wisconsin 383.5 percent, to more than $5.2 billion, but it’s not true. If a community like Mequon passes a $10 million referendum to add on to the high school, the state doesn’t give the district $6.7 million. It adds that money to the state school aid fund, which is then redistributed according to a formula based on the relative wealth of individual districts. Because Mequon has a rich tax base, the money actually goes to other districts. Says Todd Berry, Wisconsin Taxpayers Alliance president: “Some communities actually lose aid when they build, so it costs them $1.20 for every dollar of new construction.” Local property owners in the average district pay 97 percent of all building costs, not one-third.
Tax Myth 2: A $1 increase in state aid to local governments and schools means an equal decrease in local property taxes. State and national research shows that’s not true. Some money inevitably gets siphoned off as it’s passed down, usually in increased local spending.
Our Taxing Roots
From the beginning, Wisconsin set itself up to be a high-tax state. Where other states created public school systems without funding them, Wisconsin built the funding mechanism for schools – the property tax – into its 1848 constitution. The document was patterned after the Bill of Rights that Wisconsin’s Yankee founders had known in New York and Massachusetts, “a high-service, high-tax” model, says Madison attorney Joseph A. Ranney, an authority on Wisconsin’s legal history.
By 1889, the state needed more money and it added an inheritance tax with little opposition. Corporate income taxes followed, but when the depression of 1893-’95 caused that revenue to drop and property tax rates to rise, farmers rebelled, establishing a pattern of property tax rebellion and political reaction. Running for governor, Robert LaFollette promised reform. Once elected, he created a permanent tax arm of state government and levied fees on utilities and streetcar companies.
At the state’s beginning, there had been a general distrust of government and a desire to restrict its powers. But between 1897 and 1925, LaFollette and his Wisconsin Progressives changed that. They demonized and weakened political parties and created a permanent government workforce. LaFollette may have believed that the civil service could continue his reforms when he left office, says Ranney. It, too, generated little public controversy.
With the Progressives in charge, the state’s property tax levy nearly doubled between 1905 and 1910, but instead of rebelling against the Progressives, taxpayers revolted against the property tax. In 1908, hoping to ease the property tax burden, they voted overwhelmingly (by a 69 to 31 percent margin) to approve the first comprehensive state income tax in the United States. “Most people [including even the state Supreme Court] thought the income tax would quickly supercede the property tax,” says Ranney. But over the next decade, the property tax levy more than doubled and the Progressives used the revenue “to lay the foundation for the state’s modern social welfare system.”
Not only did Wisconsin get into the taxing and spending business early and often, state politicians had the advantage that came with the Progressive legacy – the belief that government was benevolent. And that made taxing and spending easier. In fact, the belief in “clean government” became so pervasive that few journalists even questioned it. It would take 80 years to change that.
No Room to Cut?
You’ve heard the claim that state services are already so close to the bone that any more cuts in budgets will mean human suffering. Your son won’t get into the University of Wisconsin-Madison, for example. Or the funding for abused and neglected kids will get cut. The truth is, the state doesn’t take advantage of consolidations that cry out to be done.
One example is the state’s two-year UW System campuses. According to a 2002 study by then University of Illinois education professor F. King Alexander, Wisconsin spends 63.2 percent more than the national average on its two-year colleges. Taken together, the 13 separate campuses serve 12,377 students, the equivalent of just 8,773 full-time students. Wisconsin has more public higher education campuses per 1,000 residents than any other state, says Wisconsin Taxpayers Association President Todd Berry. And to staff them in 2000, state taxpayers employed one-third more higher education instructors per 1,000 of population than the national average. Taxpayers fund approximately one-third of the cost of the UW System, but the total amount we spend is still 30 percent above the national average because of the number of campuses around the state with few students and no economies of scale, he says.
Taxpayers also subsidize 13 four-year campuses, the statewide UW-Extension and 16 tech schools with 45 campuses, including at least four that provide the same liberal arts education for underclassmen that the two-year schools do but at lower cost. For the current 2002-’03 school year, half of the $73 million budget for the 13 two-year campuses came from state revenue. Local governments share in the facilities cost, says state Sen. Bob Welch (R-Redgranite), “so we don’t pay it all.” No, but local taxpayers do.
The rationale for having all of these campuses is that it provides wider public access, but that was a better argument before we had good highways, Internet classes and multiple cars per family. If the decision were left to the UW System leaders, they’d probably do what makes economic sense, says one insider, but it’s up to legislators, and even the most fiscally conservative, like Welch, are afraid to touch the issue.
“We’d never build all these campuses today. We’d look at cost per student,” he says. “We have a two-year campus in Superior that stands out because it has so few students, and most of them are from Minnesota.… If you close them all and the students go to the tech schools, is it cheaper? Yes. But politically, it’s just too difficult,” says Welch, but then he has a second thought. “But if the governor suggests closing them, they’re done. Otherwise, it will never happen.”
Tax Myth 3: A frozen or falling property tax rate means property tax bills will go down. Local governments and school districts may boast “we held the tax rate,” but if property values double, unless the taxing district cuts the rate in half, it will take in twice as much in taxes. Say your house was valued at $100,000 last year and you paid the tax rate of $1 per thousand, for a total bill of $100. Now it’s reassessed at $200,000 and the rate stays at $1 per $1,000 of value – your tax bill will be $200 and you’ve had a 100 percent tax increase.
The City of Milwaukee is a prime example of the falling tax rate/rising tax bills scenario as property assessments have risen during most of the past decade. In 1999, for example, Milwaukee still had the sixth-highest property tax rates among the largest cities in the 50 states.
Tax Myth 4: County sales taxes reduce local property tax levies. Over the past 20 years, only six counties have followed state law requiring county sales tax (now collected in 57 of Wisconsin’s 72 counties) to be used “only for directly reducing the property tax levy.” Statewide, only 28 percent of local sales tax revenue actually went to lower local property taxes, according to a June 2002 study by the Wisconsin Taxpayers Alliance.
Tax Myth 5: The Wisconsin school finance system is highly inequitable and it has gotten worse over the past decade. “No tax financing system is perfect, but this one does a reasonably good job of aiding the poor districts,” says Berry. “Eighty percent of the state’s school districts are clustered around the median, thanks to shared revenue. Critics focus on the extreme examples, rich districts like Nicolet, but the disparities between districts has decreased over the last 10 years.”
Tax Myth 6: Property tax exemptions are the main reason businesses pay a smaller share of total property taxes today. The real reason is that residential and commercial property values (things like strip malls and office space) have skyrocketed in value statewide during the past 20 years, while the value of manufacturing properties has remained stagnant. As a result, residential and commercial property owners now pay 70 percent of all Wisconsin property taxes instead of the 50 percent they paid in the early 1980s. In addition, $644 million in property taxes once paid by farmers has been shifted to other properties.
Fringe Benefits and the Two-class System
When politicians talk about disparities between the classes, they’re usually referring to the urban poor and wealthy suburban whites. But Wisconsin has another system of haves and have-nots that politicians would rather not discuss – because they’re part of it. And that system has a lot to do with the state’s high taxes. Government employees – teachers, university employees, state workers and elected and appointed officials – enjoy top-of-the-line healthcare benefits, early retirements and lucrative pensions most taxpayers could never afford.
“In a funny way, they are the ruling elite. For them, higher taxes mean better benefits. But why should a guy in South Milwaukee work 60 hours a week busting his ass for that?” asks Jim Miller, president of the conservative Wisconsin Policy Research Institute (WPRI).
If you work in the private sector, says Todd A. Berry, Wisconsin Taxpayers Alliance (WTA) president, your benefits equal 20 to 25 percent of your pay. But if you’re on the public payroll here, your benefits can easily be twice that, and those better benefits aren’t making up for inferior pay. In fact, compared to national averages, public employees are some of the best-paid workers in the state.
Wisconsin salaries in general lag behind the national average by 13.3 percent, according to the Census Bureau. Blue-collar workers earn close to the national average, but the pay disparity grows larger the more education and experience you have. Only construction workers (+3.7 percent) and government workers earn more than average. In 2000, according to WTA, state employees earned 9.9 percent above the national average, 10th highest in the nation; local government employees, 1.3 percent above the norm. The highest paid include higher education non-instructional staff (17 percent above the norm; fourth highest nationally) and judges and legal personnel (33 percent above; third highest in the nation).
On July 1, state employee pay raises worth $124.7 million are scheduled to go into effect, with increases ranging from 5.8 percent for administrative staffers to 9.16 percent for blue-collar workers. Meanwhile, a lot of private-sector employees in the state have had their wages frozen or have been laid off.
To understand just how cushy government workers have it, look at their retirement program. According to a FY 2001 Census Bureau study, Wisconsin’s state and local government employees contributed just 5.7 percent of the money needed toward their own retirement. Taxpayers paid the remaining 94.3 percent. Government workers elsewhere pay an average of 40.7 percent. In Wisconsin, the average government employee kicks in $200 toward their own retirement, compared to the national average individual contribution of $1,907. Government workers can also retire sooner (as early as age 50), then get a second job and second pension or, in the case of teachers, collect their state pension while getting paid as substitute teachers. More than 269,000 state and local employees and 113,000 retirees participate in the Wisconsin Retirement System.
With healthcare costs rising at double-digit rates, a lot of private-sector employees have seen their insurance coverage diminish or disappear, but government workers get coverage for almost every healthcare dollar they spend, with little, if any, deductible, and that’s consuming an ever-increasing percent of state tax revenue, too. Eighty percent of the state’s 426 school districts purchase their health insurance from the teachers’ union health insurance company, Wisconsin Education Association Trust, without getting competitive bids. And when districts have tried to get competing bids, the teachers’ union insurance company has refused to release the experience data necessary to provide bids.
For the school year ending in 2000, WTA found that fringe benefits for all K-12 school staff totaled $1,708 per student, the fourth highest in the nation and 50 percent above the U.S. average. Meanwhile, teacher pay was close to the average, although their cost of living is less.
Milwaukee Public Schools are a good example. Rapidly rising insurance costs (20 percent on healthcare, 10 percent on dental this year), plus pension costs, are forcing administrators to reduce art and music programs, cut library hours and drop field trips. Next year, MPS expects to spend 55 cents on benefits for each dollar paid in salaries, and long-term projections only shoot skyward. Because copious health benefits continue into retirement for most Wisconsin public school teachers, much of the increase in school spending doesn’t have anything to do with kids!
Tax Myth 7: If we’d just consolidate governmental units, all of our budget problems would go away. This is a popular belief among conservatives, but it’s no silver bullet. Consolidation is politically unpopular and extremely difficult. Look at the case of the two Pewaukees – the city and the village. And even if the politics work, the expense reductions from mergers and shared services tend to be relatively small.
Tax Myth 8: Wisconsin’s corporate taxes are among the highest/lowest in the country. Whether you’re a conservative who thinks they’re too high or a liberal who thinks they’re too low, you’re going to be disappointed because Wisconsin’s corporate taxes are actually pretty close to the middle. In fiscal year 2000, Wisconsin ranked 24th in corporate tax revenues, and that was 13.3 percent below the U.S. average. Most mainstream economists now concede that business taxes are ultimately born by individuals: business owners and stockholders (who get less in profits), employees (who get lower wages) and consumers (who pay higher prices).
